Time is running out; Xstrata has until Monday to accept Glencore's $90 billion takeover bid. However the deal has hit a snag which is proving difficult to overcome, and could prove to be the death of the merger.
Glencore's initial offer of 2.8 of its own shares for every Xstrata share was rejected by some of the large Xstrata shareholders who threatened to block the deal unless an improvement was made.
Glencore upped the offer to a ratio of 3.05 to 1, but also changed other conditions of the merger, and it is here that the problem has arisen.
Glencore has altered the makeup of the new company in order to give them more control over management. In the original deal Xstrata were going to be given most of the control of the company, with the CEO Mick Davis, Chairman John Bond, and CFO Trevor Reid, keeping their positions in the new company. Now, however, Glencore are demanding that their CEO Ivan Glasenberg will replace Mick Davis, and Xstrata shareholders worry that this will cause their top executives to resign.
Back when the merger was first proposed Xstrata's directors noted that "the new business model resulting from the merger, and its ability to generate superior shareholder returns, is dependent on the retention of key Xstrata personnel," which makes it "essential for the success of the merger."
The problem is not to do with ego or corporate pride, it is about the expertise that those executives bring to the new company.
Xstrata is a huge mining company, and Glencore is one of the largest international traders of materials such as what, oil, and copper. The two businesses are completely different. Mining is a long term investment, whereas trading is fast paced, requiring rapid decisions in order to reap short term profits.
Mining will dominate the operations of the new company, accounting for around 84% of operating profits, but if Glencore executives take positions of power ahead of Xstrata, then vital mining expertise will be lost which could negatively affect the health of the company in the future.
By. James Burgess of Oilprice.com
James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also… More